Saturday, 14 February 2015

What is Early Retirement? How many years before I retire?

I routinely get asked by readers of my blog, about my age, how many years I have been saving, and when do I plan to retire.  There are others who write me asking about my definition of early retirement.  Would retiring at the age of 50 be called "early retirement"?  How about if you took a Voluntary Retirement option from your company, and then took up another less demanding job?  Does that meet the definition of early retirement? And so on and on.  Here is how I look at it, and it has nothing to do with your or my age, if you can believe it!!

In my mind the concept of retirement, whether early or just your regular retirement, is simply a matter of three different phases in your life.  In your first phase, you are dependent on your parents, you do not have any earned income, and you are just learning about life through school and college.  Most of us do not focus on any savings or investments at this time, and outside of a part time job or internship, we are not bothered about money or finances in general.  We are completely dependent on our parents to provide for us.  

Once we get a real job, and start earning, and become financially independent adults, we embark on the second phase of our careers.  In this phase, we should be focused on earning, saving, and investing in that order.  Depending on your financial literacy, you may start saving and investing early in this phase, or late in this phase, but no matter what, this is the only time that you have to build your retirement corpus.  Typically in India people spend upto 40 years in this phase of their lives.  For example if you started working at the age of 24, and retired at the age of 64, you'd have worked for a total of 40 years.  It is not uncommon to have people working into their early 60s, and depending on when you started working, you could have easily spent 30-35 years in the work force earning an active income.  I call this the active earning phase.

The third and final phase is after you retire, when you no longer are part of the active work force.  You may choose to take on some part time work in this phase to supplement your income, but you fundamentally do not have a regular source of active income at this time, and are highly if not completely dependent on your retirement corpus for your financial existence.  With growing life expectancy in India, you need to factor in upto 30 years of living in this phase.  For example if you retire at the age of 62, in my opinion you should be prepared for your retirement corpus to last you for 30 years into your early 90s.  You will need to do this to ensure that you or your spouse do not run out of money in the golden years of your life.  I call this the passive earning phase.

With this understanding in place, I simply think of retirement as the point, when you transition from the active earning phase to the passive earning phase.  In my book if you spend more than 35 years in the active earning phase of your life, you have been on the path of regular retirement.  You are no different than the millions of people who work through every hour and every year of their healthy lives striving to earn, and hopefully put together a large enough retirement corpus to last them through their passive earning phase.

However, if you have been proactive in your active earning phase, you will likely do better than having to work for 35+ years.  Below is a table with my thoughts on the number of years you spend in your active earning phase.

So where do I think I am headed for?  Well I have been targeting working for 10-15 years, and then calling it quits.  I have been focused on a high savings rate, prudent and steady investments, and hoping for some small measure of luck!  Currently I seem to be trending to be in the 15-20 years category, which would still be a pretty good achievement if I make it there in one piece. 

I am certain, this will be a rather controversial post, particularly the retirement ratings table.  But hey, somebody had to put it out there!  Write me up and let me know how much and what you agree or disagree to


  1. Agreed…. Wow thanks for your post. Like you have rightly put it, if you start working at the age of 24 years by when most young boys and girls should have even finished their post graduation studies, and they would start earning by then. If we go by your post, then the early retirement age would be between 39 years and 44 years. I believe if a person lives frugally, making some sacrifices and saves from his first salary. It’s possible to retire early or at least get out of the “rat race” where passive income from dividends from shares, interest from tax free bonds and rent from second property should be more than your annual expenses. Hence I guess the median age of 42 would be the ideal age to consider as early retirement age.

  2. I think you should do a new post of portfolio allocation….During the different phases of life ….

    Accumulation Phase - the time between when you start working and retire early….
    Early Retirement Phase -time between early retirement and when others normally retire…….
    Retirement Phase – the time between when others normally retire and death.

    I have achieved my Early Retirement and my current portfolio is
    * Shares – 60%,
    * Equity Mutual Fund – 15%,
    * NPS (National Pension Scheme) – 10%,
    * Fixed Deposit (including Tax Free Bonds) – 5%,
    * REITS (Real Estate Investment Trust) – 4% (but this is presently invested in Fixed Deposits and will transferred to REITS when available). Thus the present amount in fixed deposit equals 9%
    * Gold ETF’s – 5%,
    * Cash – 1%.

    This takes the total to 100%.

    Besides this I have invested
    - 5% equivalent of my net portfolio into a diversified Equity Mutual Fund in my daughter’s name to be used for her higher education.

    Let me know your view about my asset allocation ... I plan to retire early this year in August and I would be 42 by then

    1. Hi Leon, interesting asset allocation clearly banking on equity growth to manage inflation. Do you propose to have other cash flow/income for your monthly expense? Prima facie, the FD allocation seems insufficient unless you have a strategy to keep moving funds from other asset classes to this category.

  3. Where will you get your monthly income if <10% is in FD's

  4. Why should some one retire early if you like the job earn enough, spend wisely and work without any pressure for 35-40 years...

  5. Why should some one retire early if you like the job earn enough, spend wisely and work without any pressure for 35-40 years...

  6. Where will you get your monthly income if <10% is in FD's